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Astroturf: Interest Group Lobbying

and Corporate Strategy
THOMAS P. LYON
Michigan Business School
University of Michigan
Ann Arbor, MI 48109
tlyon@umich.edu
JOHN W. MAXWELL
Kelley School of Business
Indiana University
Bloomington, IN 47405
jwmax@indiana.edu
We study three corporate nonmarket strategies designed to inﬂuence the
lobbying behavior of other special interest groups: (1) astroturf, in which the
ﬁrm covertly subsidizes a group with similar views to lobby when it normally
would not; (2) the bear hug, in which the ﬁrm overtly pays a group to alter
its lobbying activities; and (3) self-regulation, in which the ﬁrm voluntarily
limits the potential social harm from its activities. All three strategies reduce
the informativeness of lobbying, and all reduce the payoff of the public decision-
maker. We show that the decision-maker would beneﬁt by requiring the public
disclosure of funds spent on astroturf lobbying but that the availability of
alternative inﬂuence strategies limits the impact of such a policy.
1. Introduction
The role of interest groups in politics has held a long-standing fasci-
nation for political economists. In the 1780s, James Madison famously
warned of the power of “factions” in The Federalist, while nearly
200 years later Mancur Olson and George Stigler elevated the study
We would like to thank two anonymous referees and participants in a number of
seminars for their helpful comments, including the 2002 Strategy and the Business
Environment Conference at Stanford University, Cambridge University, Katholieke Uni-
versity of Leuven, the University of Bonn, the 21st Rutgers Workshop on Public Utility
Regulation, the SecondWorldCongress of the Associationof Environmental andResource
Economists, University of Victoria, Resources for the Future, Indiana University, and
Harvard University.
c 2004 Blackwell Publishing, 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road,
Oxford OX4 2DQ, UK.
Journal of Economics & Management Strategy, Volume 13, Number 4, Winter 2004, 561–597
562 Journal of Economics & Management Strategy
of interest group politics to an important subﬁeld within economics.
1
Pioneering theoretical work in the Chicago School tradition treated
interest group “pressure“ as a production function, smooth and twice
continuouslydifferentiable.
2
Inthis framework, interest groups compete
to apply more pressure in a game where rival pressure inputs are
strategic complements. More recently, theorists have been opening up
the black box of political pressure to focus more explicitly on speciﬁc
strategies such as campaign contributions or lobbying.
3
Several recent papers shednewlight onthe role of lobbying incon-
veying “soft,” i.e., unveriﬁable, information to public decision-makers.
4
In these models, interest groups may be able credibly to transmit soft
information about the state of the world if their preferences do not
diverge too greatly from those of the decision-maker. This recent work,
however, typically does not distinguish ﬁrms fromother special interest
groups. We argue that in many lobbying situations, ﬁrms cannot convey
unveriﬁable information credibly because their payoffs depend only on
the policy imposed by decision-makers and not on the underlying state
of the world. In the case of local environmental issues, for example,
the relevant state of the world is the environmental damage done by a
particular pollutant, whichoftenis unknowntopolicymakers. However,
environmental regulations often require ﬁrms to use the “best available
control technology,“ the cost of which is independent of the state of
the world. Does this mean the ﬁrm is impotent in such situations, or
are there other strategies it can employ to inﬂuence the information
decision-makers receive? What impact might these alternative strategies
have on public decision-making? Existing models shedno light on these
questions, since they do not distinguish between the ﬁrm and other
interests involved in transmitting soft information to decision-makers.
In this paper, we present a formal model of lobbying as a means of
transmitting unveriﬁable information and clearly distinguish the ﬁrm
from other special interest groups. We show that while the ﬁrm is not
1. Olson(1965) elaborates a rational choice model of interest groupaction, while Stigler
(1971) applies this approach to the study of regulation speciﬁcally.
2. Key early papers include those of Peltzman (1976) andBecker (1983). For an analysis
of self-regulation that builds on this literature, see Maxwell et al. (2000).
3. For example, Lupia and McCubbins (1994) and de Figueiredo et al. (1999) study
how administrative procedures can be designed to optimize the ﬂow of information to
politicians, and Baron (2001) develops a model in which activists attempt to inﬂuence
corporate strategy via the threat of consumer boycotts. Kollman (1998) studies the
motivations and strategy behind lobbying behavior based on detailed interviews with 90
interest group leaders. Grossman and Helpman (2001) provide an excellent introduction
to the recent theoretical literature on interest group politics.
4. See, for example, Lohmann (1993) and Krishna and Morgan (2001). These models,
which build on the seminal work of Crawford and Sobel (1982), must be distinguished
frommodels of the provision of “hard,” veriﬁable information, as analyzed in papers such
as Milgrom and Roberts (1986).
Astroturf: Interest Group Lobbying and Corporate Strategy 563
a credible source of such information, it nevertheless can inﬂuence
the lobbying behavior of other interest groups through a variety of
strategies. The decision-maker initially is uncertain of the state of the
world and desires full information so that he can match the stringency
of policy to the severity of the state of the world. The ﬁrm, however,
has incentives to manipulate the ﬂow of information to the decision-
maker. We explore a series of corporate strategies that impede the ﬂow
of information to the decision-maker, show that the decision-maker is
harmed by these strategies, and identify public policies that hinder the
ﬁrm’s ability to engage in them.
Most prominent among the strategies we consider is the funding
of astroturf lobbying, a term coined by Lloyd Bentsen, long-time senator
from Texas, to describe the artiﬁcial grassroots campaigns created by
public relations (PR) ﬁrms (Stauber andRampton, 1995, p. 79). One such
ﬁrm is Davies Communications, whose advertising says, “Traditional
lobbying is no longer enough. Today numbers count. To win in the
hearing room, you must reach out to create grassroots support. To
outnumber your opponents, call the leading grassroots public affairs
communications specialists” (Stauber andRampton, 1995, p. 90). Davies
explains how his ﬁrm generates a “grassroots” letter-writing campaign
through the use of telephone banks:
We get them on the phone, and while we’re on the phone
we say ‘Will you write a letter?’ ‘Sure.’ ‘Do you have time
to write it?’ ‘Not really.’ ‘Could we write the letter for you?
I could put you on the phone right now with someone who
could help you write a letter. Just hold, we have a writer
standing by’ . . . If they’re close by we hand-deliver it. We
hand-write it out on ‘little kitty cat stationery’ if it’s a little
old lady. If it’s a business we take it over to be photocopied
on someone’s letterhead. [We] use different stamps, different
envelopes. Getting a pile of personalized letters that have a
different look to themis what you want to strive for (Stauber
and Rampton, 1995, p. 89–91).
One example of astroturf lobbyingis the groupPeople for the West!
(PFW!) which characterizes itself as “a grassroots campaign supporting
western communities.” In 1992, 96% of the group’s funding came
from corporate sponsors such as NERCO Minerals, Cyprus Minerals,
Chevron, and Hecla Mining, who have strong interests in maintaining
the General Mining Act of 1872 that allows themto acquire and to mine
public lands at a cost of $5 per acre. The chair of PFW!, Bob Quick,
is the national director of state legislative affairs for Asarco, a mining
564 Journal of Economics & Management Strategy
company.
5
Another example is the Consumer Alliance, a Michigan-
based nonproﬁt that opposes laws to lower the price of prescription
drugs to Medicaid participants and other low-income citizens. Apublic
relations ﬁrmcalled Bonner &Associates—funded by the Pharmaceuti-
cal ResearchandManufacturers of America (PhRMA)—uses Consumer
Alliance letterhead to solicit signatures in support of its positions.
6
Astroturf lobbying relies on the covert nature of corporate spon-
sorship in achieving its effectiveness, and Congress is well aware of the
possibilitythat some apparent grassroots lobbyingcampaigns mayhave
been manufactured by large corporations. Indeed, as we discuss further
in section 3 of the paper, Senator Carl Levin has sponsored legislation
that would require the disclosure of corporate expenditures on such
lobbying. The language on astroturf lobbying was stripped fromthe bill
that ultimately was passed, however, leaving this particular lobbying
technique obscured from public view. We argue that while disclosure
would be socially beneﬁcial, it would not be a panacea, due to the
availability of alternative corporate strategies that in many cases can
accomplish the same outcomes as astroturf lobbying.
We coin the term bear hug to refer to a second corporate strategy
of embracing one’s opposition through overt payments designed to
alter their lobbying behavior. This undermines the opposition’s abil-
ity to transmit its information through costly signaling. For example,
DeSimone andPopoff (2000) point out that “it is also important to recog-
nize that there can be a disparity of resources and information between
business stakeholder groups that makes trust difﬁcult to develop. This
maysometimes requireactiontoredress thebalance. SincetheBrent Spar
incident—when opposition prevented Shell from disposing of a large
oil storage platform at sea—the company has made space available for
environmental groups to explain their point of view in educational and
other materials that it has prepared“ (p. 165).
In this example, Shell is subsidizing the communication efforts of
environmental groups. The bear hugstrategyalsocaninvolve payingin-
terest groups not to communicate on certain issues. Several examples of
such a strategy, according to Huberty (2003), come from Jesse Jackson’s
“Wall Street Project,” which encourages large corporations to hire more
minority employees, do more business with minority-owned ﬁrms, and
place more minorities on their boards of directors. For instance, the
Telecommunications Act of 1996 mandated certain minority set-asides,
and Jackson appointed himself the task of overseeing whether large
telecoms ﬁrms were doing enough to promote minority businesses. His
5. For further details, see Sanchez (1996).
6. For more details, see Craig (2002).
Astroturf: Interest Group Lobbying and Corporate Strategy 565
threats to campaign against the proposed merger of SBCand Ameritech
inducedthe twoﬁrms togive $500,000toJackson’s nonproﬁt Citizenship
Education Fund. Afterward, Huberty (2003) reports, “Jackson overcame
his concerns and praised the companies’ commitment to diversity.“
Other corporations that have been induced through similar means to
contribute to Jackson’s organization include AT&T, Viacom, GTE, Bell
Atlantic, Verizon, Texaco, Kentucky Fried Chicken (KFC), Burger King,
7-Eleven, Coors, and Coca-Cola.
7
The third strategy we examine, self-regulation, is quite different
fromthe other two strategies in that it involves real changes in company
operations designed to reduce the risks of social harm. For example, a
paper company might choose to install a totally chlorine-free manufac-
turing process to eliminate the risk of emitting organochlorines into a
body of water. If these actions are substantive enough, interest groups
maydecide that the further gains fromlobbyingare not enoughtojustify
the costs, andtheymayeschewparticipationinthe political process. The
literature has examined environmental self-regulation from a variety of
perspectives—but typically within the context of models with complete
information.
8
In the present paper, however, the decision-maker has
incomplete information, which implies a heretofore unrecognized effect
of self-regulation: it may stem the ﬂow of information to the decision-
maker that would have allowed himto tailor the stringency of policy to
the severity of the state of the world.
The remainder of the paper is organized as follows. Section 2
presents a simple model of the lobbying process. Section 3 studies astro-
turf lobbying, while Section4 considers the bear hug. Section5 addresses
the effects of self-regulation, and Section 6 discusses extensions of our
model to a setting with multiple interest groups. Section 7 concludes.
2. A Simple Model of Lobbying
Our basic model of lobbying has three players: a government decision-
maker (DM), a special interest group (SIG), and a ﬁrm.
9
As we will
show, the ﬁrm’s objective function is such that it cannot play a direct role
7. Huberty (2003) basedhis article ona book by KennethTimmermantitledShakedown:
Exposing the Real Jesse Jackson (Regnery Publishing, 2002).
8. For an introduction to this literature, see Lyon and Maxwell (forthcoming).
9. The model builds on the work of Potters and van Winden (1992). We have chosen to
use a very simple underlying model and to eschew extensions such as those pursued by
Lohmann (1993) in which the DM is uncertain about the SIG’s bias and uses the extent of
political turnout to infer the state of the world (although we do discuss the possibility of
multiple SIGs in section 6). Grossman and Helpman (2001, ch. 5) provides a nice survey of
these and other extensions to the basic model. For our purposes, though, these extensions
would complicate matters without adding much additional insight.
566 Journal of Economics & Management Strategy
effectively in the lobbying process, though it may be able to inﬂuence
the process through payments to the SIGor through self-regulation. We
assume the existence of a proposal that affects the ﬁrm and requires the
approval of the decision-maker, who may impose a variety of require-
ments on its passage to ensure that it is socially beneﬁcial. The proposal
might be an application for planning approval of a new manufacturing
facility, in which case the DM may require that the manufacturer install
certain emissions control systems as a condition of operation. In a
legislative context, the proposal might call for amendment of the General
Mining Act of 1872, in which case the DM might require the use of
auctions to allocate mining rights on public lands, ensuring that the
ﬁscal impact of the act is minimized. Alternatively, the proposal might
be aimed at health care reform, in which case the DM might require
state Medicaid programs to negotiate the lowest possible prices from
pharmaceutical manufacturers. Ineachcase, the proposal before the DM
gives the affected ﬁrms a powerful incentive to attempt to inﬂuence the
policy process.
For ease of presentation we couch our discussion in the context
of a decision-maker’s choice of stringency for a local planning permit
to build a local manufacturing facility, though our results apply much
more generally.
10
The construction of a manufacturing plant may have
social effects through a variety of mechanisms: e.g., it may create jobs
in the local community; it may affect the environmental quality of the
surrounding community; and it may affect the health and safety of that
community. These effects can be summarizedby a variable θ ∈ , which
represents the true state of the world. For simplicity, we will assume that
the state of the worldcaptures the net adverse social impact of the project
and can be either “low” or “high,” so θ ∈ {θ
L
, θ
H
}.
11
The DM chooses a policy p that indicates the stringency of the
regulatory response to the proposed project. The DMis assumed to care
about his or her constituency, perhaps because of reelection concerns.
The DM’s preferences are represented by G = −(p −θ)
2
, which implies
10. It is important to note that the modeling of the decision-maker as a unitary actor
does not limit its applicability to the planning context. Other authors, such as Lohmann
(1993), have used unitary-actor models to represent a political leader who responds to
the preferences of the median voter. We will discuss our model’s implications for the
legislative context as appropriate later.
11. An alternative modeling approach would be to assume a continuous probability
distributionover a compact set of states, as inthe papers byCrawfordandSobel (1982) and
Krishna and Morgan (2001). These papers show that equilibria in such settings typically
involve the partitioningof the state space intoa ﬁnite number of regions, withthe informed
partyable tosendonlycrude signals tothe uninformedpartyregardingthe regioninwhich
the state lies. Our formulation captures the key qualitative feature of these models with
simpler mathematical machinery by allowing for only two states. This allows us to focus
more sharply on the alternative corporate strategies that are our main interest here.
Astroturf: Interest Group Lobbying and Corporate Strategy 567
that the DM attempts to match the policy precisely to the state of the
world. If the project is likely to have a highly adverse social impact
on the local community, then the DM would favor setting a more
stringent regulatory policy. Setting a policy that is higher than the
true state is undesirable for the DM, because, for example, doing so
might bring unnecessary economic hardship to the ﬁrm, which in turn
may affect employment negatively in the local community. Setting too
low a stringency also is undesirable for the DM, since community
environmental, health, and safety conditions may be affected adversely.
The DM’s prior belief is that either state of the world is equally likely.
12
Without further information, the DM’s best policy decision is to
max
p
1
2
_
−( p −θ
L
)
2
_
+
1
2
_
−( p −θ
H
)
2
_
.
Consequently, under conditions of uncertainty the DM’s optimal de-
cision is to set a moderately stringent policy of p = (θ
L
+θ
H
)/2 with
E(G) = −(θ
H
−θ
L
)
2
/4. We refer to a policy set at this level as the average
policy.
The SIGis assumedto knowthe true state of the world.
13
The SIG’s
preferences are given by U = −(p −θ −δ)
2
−l, where δ represents the
divergence between the SIG’s preferences and those of the DM and
where l represents the cost to the SIG of lobbying the DM. Given this
speciﬁcation, the SIG always prefers a higher (lower) level of the policy
p than does the DM when δ is positive (negative). We refer to δ as
the SIG’s bias. The general form of the SIG’s utility function captures
the assumption that the SIG cares about both the project’s social and
economic effects on the local community. That is to say, even a positive-
biasedSIGmay prefer a less stringent policy to a more stringent policy if
the true state of the worldis lowenough. Note also that the lobbyingcost
l can be interpreted as a proxy for the trade-offs the SIG must make in
allocating its resources between lobbying and other valuable activities.
The location of manufacturing plants often is plagued by opposi-
tion from local residents who proclaim that the plant can be built—but
“not in my backyard.” While this may be a purely political phenomenon
in some cases, in others it may reﬂect local knowledge of community
preferences over the impacts of the project. In any event, it is natural
to assume δ > 0 in this situation, and we use this assumption in laying
12. We could relax this assumption easily without changing the qualitative nature of
our results, but we donot believe the additional notationwouldgenerate anynewinsights.
13. This may reﬂect technical knowledge, e.g., regarding groundwater ﬂowin regions
of karst topography, or social knowledge, e.g., regarding local community preferences. We
also could allow the SIG to have imperfect information about the state without changing
our results qualitatively.
568 Journal of Economics & Management Strategy
out the basic structure of the model. We begin our analysis with the
case where l = 0, i.e., the (positive-biased) SIG knows the true state of
the world and can lobby costlessly (i.e., report the state to) the DM.
We examine the SIG’s incentives to report the true state of the world
when the DM believes the SIG’s announcement. Since the SIG always
prefers a higher level of policy than the DM, it naturally has no incentive
to misreport when the state is θ = θ
H
. Misreporting may be desirable,
however, if θ = θ
L
. In this case, the SIG misreports, i.e., reports θ
H
, if its
utility of obtaining θ
H
in the low state exceeds its utility from reporting
truthfully, that is, if
−(θ
H
−θ
L
−δ)
2
> −(θ
L
−θ
L
−δ)
2
.
Thus, when θ = θ
L
, the SIG misreports if
δ > (θ
H
−θ
L
)/2. (1)
Consider a case where condition(1) holds. This implies that the SIG
has a large degree of bias or, alternatively, that the high and low states
are relatively close together. In this case, the SIG always will report that
θ = θ
H
, regardless of the actual state of the world. Assuming the DM
knows δ, θ
L
, and θ
H
, she will recognize the SIG’s incentives and hence
will not update her prior based on the SIG’s report. Thus, the DM sets
p = (θ
L
+θ
H
)/2. If condition (1) fails to hold, then the SIG will report
truthfully, and the DM will use the SIG’s report to set a policy of θ
L
in
the low state and of θ
H
in the high state.
14
When condition (1) holds, the SIGcannot report truthfully if l = 0,
but it may be able to do so if lobbying is costly. Because the SIG is
biased toward high levels of policy, it is concerned particularly about
the possibility that the DM sets p = θ
L
when the state is actually θ
H
.
Thus, the SIG is motivated strongly to incur the cost of lobbying when
the state is θ
H
but may not ﬁnd it worthwhile when θ = θ
L
. Under
certain conditions, which we explain following, there exists a sequential
equilibrium
15
(henceforth, an “equilibrium”) in which the SIG only
lobbies when θ = θ
H
. In the equilibrium, the DM holds the belief that if
the SIGlobbies then indeed θ = θ
H
, and if the SIGfails to lobby then the
state is θ
L
. For this equilibrium to exist, the SIG must prefer to refrain
14. Even when (1) fails, the truthful equilibrium is not unique. There always exists
an equilibrium in which the DM distrusts the SIG’s information and hence always sets
the average policy. As a result, any signal by the SIG constitutes a best response. This
equilibrium is not particularly interesting, however, and we will not consider it in the
remainder of the paper.
15. In our model with only two possible states of the world, the set of sequential
equilibria is equivalent to the set of perfect Bayesian equilibria.
Astroturf: Interest Group Lobbying and Corporate Strategy 569
from lobbying when θ = θ
L
, i.e., −(θ
L
−θ
L
−δ)
2
≥ −(θ
H
−θ
L
−δ)
2
−l,
or
16
l ≥ l ≡ (θ
H
−θ
L
)(2δ −(θ
H
−θ
L
)). (2)
At the same time, the SIG must be willing to incur the lobbying
cost when the state is high, i.e., −(θ
H
−θ
H
−δ)
2
−l ≥ −(θ
L
−θ
H
−δ)
2
,
which can be rewritten as
l ≤
¯
l ≡ (θ
H
−θ
L
)(2δ +θ
H
−θ
L
). (3)
If both(2) and(3) hold, thenthe informative equilibriumdescribed
previouslyexists; inthe remainder of the paper, we will focus onthe case
where an informative equilibrium exists, since it is only in this case that
the corporate strategies we study are useful. Thus, a positive lobbying
cost aids the SIG in truthful reporting by allowing it to express the
intensity of its preferences. As we shall see in the subsequent sections,
this result gives rise to a number of somewhat unexpected corporate
strategies aimed at undermining the SIG’s ability to communicate its
views.
Letting a ≡ (θ
H
−θ
L
), Figure 1 illustrates the values of l and a that
give rise to a truthful reporting equilibrium. In this equilibrium, the SIG
lobbies when the state is high and not when the state is low, and the DM
holds theconsistent beliefs that thestateis highwhentheSIGlobbies and
is low otherwise. The top line in the ﬁgure represents the combinations
of l and a for which the SIG is just indifferent between lobbying when
the true state of the worldis θ
H
andnot lobbying in that state. Above this
line, the SIG will choose not to incur the costs of lobbying even in the
highstate. The lower line traces out the combinations of l anda for which
the SIG is just indifferent between lobbying in the low state (and falsely
announcing θ
H
) and not lobbying in the low state. For all combinations
of l and a below the lower line, the truthful reporting equilibrium fails
to exist. To see this, suppose the DM believes he is playing the truthful
equilibrium. For points below l, the SIG then would have incentives to
lobby in both states of the world, which is inconsistent with the posited
beliefs of the DM. Thus, for l < l, all equilibria are uninformative.
17
Consider the case of siting a new paper-making facility, which
will release some volume of organochlorines into a river. The facility
16. Note that with some rearranging of terms, the following expression reduces to (1)
when l = 0.
17. For some portions of the parameter space below l, it is possible to support an
uninformative equilbrium in which the positive-biased SIG always lobbies if the DM
holds the off-equilibriumbelief that the state is θ
L
should the SIGfail to lobby. Even when
this equilibrium does not exist, however, there is always an uninformative equilibrium in
which the DM believes the SIG’s actions are uninformative (i.e., he does not update his
prior regardless of the SIG’s lobbying actions), so the SIG never lobbies.
570 Journal of Economics & Management Strategy
a
l
2
l
l
_
Uninformative
equilibrium
Uninformative
equilibrium
Informative
equilibrium:
positive-biased
SIG lobbies only
when =
H
FIGURE1. INTEREST GROUP LOBBYING BEHAVIOR
could use a number of alternative technologies for bleaching the pulp,
which vary in their use of chlorine in the bleaching process and, thus,
in the amount of organochlorines they release into the environment.
A local environmental organization is concerned about organochlorine
releases, since they result in the presence of trace amounts of dioxins—
known carcinogens—in the river downstream from the plant. Suppose
condition (1) holds and lobbying is costless. In this case, the environ-
mental group always will participate in hearings about the plant, and it
will argue that dioxins are highly toxic chemicals whose release should
be avoided, regardless of the bleaching technology to be used and
the quantity of releases involved. Since the group always will protest
regardless of the ﬁrm’s technology, its actions convey little about the
intensity of its concerns about the technology. If it is costly for the
group to participate in the hearings, however, then the net beneﬁts of
participation are small when dioxins are released in minute amounts,
so the group will eschew participation in that case. It will allocate its
scarce lobbyingresources toﬁghtingthe plant onlywhenrelativelylarge
amounts of dioxins are likely to be released or when the downstream
population is especially vulnerable. Thus, when lobbying is costly and
when the local group does show up to participate in the proceedings,
this is credible evidence that the harm from the plant’s dioxin releases
is likely to be large, i.e., the true state is θ
H
.
18
18. For further details on the issue of chlorine in the paper-making process, see
Beckenstein et al. (1994).
Astroturf: Interest Group Lobbying and Corporate Strategy 571
A very similar analysis applies when the SIG has a negative bias,
i.e., δ < 0. Suppose that lobbying is costless (l = 0). Since the SIGalways
prefers a lower level of policy than does the DM, it has no incentive to
misreport when the state is θ = θ
L
. When θ = θ
H
, however, the SIG will
send a false report if
δ ≤ −(θ
H
−θ
L
)/2. (4)
If condition (4) holds, then the SIG always will report θ
L
, and the
DM’s optimal response to the SIG’s announcement will be to set the
average policy since the announcement is not credible. Paralleling our
result for the positive-biased SIG, it is possible for the negative-biased
SIG to lobby credibly—even when condition (4) holds—if lobbying is
costly. In an informative equilibrium, the SIG only lobbies when the
state is low, since a policy mistake in this state is very costly to the SIG;
if the state is high, however, the SIG may ﬁnd it too costly to lobby. For
this equilibrium to exist, the SIG must prefer to refrain from lobbying
when θ = θ
H
, i.e.,−(θ
H
−θ
H
−δ)
2
≥ −(θ
L
−θ
H
−δ)
2
−l, or
l ≥ l ≡ (θ
H
−θ
L
)(−2δ −(θ
H
−θ
L
)). (5)
Note that l > 0 since δ < 0.
At the same time, the SIGmust be willingto incur the lobbyingcost
when the state is low, i.e., −(θ
L
−θ
L
−δ)
2
−l ≥ −(θ
H
−θ
L
−δ)
2
, which
can be rewritten as
l ≤
¯
l ≡ (θ
H
−θ
L
)(−2δ +θ
H
−θ
L
). (6)
If both (5) and (6) hold, then an informative equilibrium exists.
An example of a lobbying game involving a negative-biased SIG
would be a decision by lawmakers on whether to require the state to ne-
gotiate with pharmaceutical companies to obtain lower drug prices for
Medicaid recipients. Suppose the consumer advocacy group Consumer
Alliance strongly opposes such negotiations on the grounds that they
would result in reduced choice in prescription drugs for senior citizens.
If lobbying were costless, then Consumer Alliance would oppose any
proposal regardless of the extent to which it limited choice. If, instead,
Consumer Alliance had to expend resources to mount a grassroots
campaign against draft legislation, then its decision to do so on any
speciﬁc piece of legislation could serve as a useful signal of the extent
to which the legislation would limit choice.
The remainder of the paper focuses on the role of the ﬁrm in the
lobbying game. Before delving into this topic, however, we ﬁrst discuss
howthe ﬁrm’s payoff function differs fromthat of the SIG. Let the ﬁrm’s
572 Journal of Economics & Management Strategy
objective function be F = −βp
2
, where β > 0. The parameter β can be
interpreted as an efﬁciency parameter: ﬁrms with large βs tend to be
less efﬁcient at adapting to more stringent policies. The structure of the
ﬁrm’s objective function indicates that proﬁts are strictly declining and
convex in the stringency of the DM’s policy, as is typical in economic
models of regulation. This might be the case, for example, for the
permitting requirements imposed on a proposed new manufacturing
facility. The vast majority of the ﬁrm’s shareholders do not live in the
local communityandhence are not affecteddirectlybyissues suchas the
availability of jobs within the community or environmental impacts of
the plant.
19
Assuming the DMis aware of the ﬁrm’s objectives, then it is
easy to see that the ﬁrmis not a credible source of information regarding
the state of the world: since its payoff depends only on the policy set by
the DM, and not on the state of the world, the ﬁrmwill adopt exactly the
same lobbying behavior in both states of the world regardless of the cost
of lobbying. As a result, the DM cannot infer anything from the ﬁrm’s
lobbying activity, and, consequently, it is pointless for the ﬁrm to lobby
the DM directly.
Although the ﬁrm cannot inﬂuence the DM directly, it has in-
centives to inﬂuence the lobbying activity of the SIG. In particular,
we identify corporate strategies that can induce a switch from an
informative equilibrium to an uninformative equilibrium. If the ﬁrm
knows the state is high, then it can engage in astroturf lobbying to
induce sympathetic interest groups to send a false report about the
state to the decision-maker. If the ﬁrm does not know the state, then
it can use the bear hug or self-regulation to induce other interest groups
to undertake the same lobbying activity in all states. Regardless of the
strategyemployed, the decision-maker is deprivedof informationabout
the state, anoutcome the ﬁrmﬁnds proﬁtable. Inthe case of astroturf, the
ﬁrmproﬁts by raising doubts about the true state when it is in fact high,
inducingthe DMtoset the average policyrather thanthe highone. Inthe
case of the bear hug or self-regulation, the concavity of the ﬁrm’s proﬁt
function means the ﬁrm gains by keeping the DM uninformed, thereby
ensuring itself the average policy outcome instead of a randomization
between the low and high policies.
19. It would be possible to conduct the analysis under the assumption that the ﬁrm’s
payoff has the same structure as that of the SIG but that the ﬁrm’s bias is so large that
it cannot support an informative equilibrium, i.e., at least one of conditions (5) or (6) is
violated. The analysis wouldbe muchmore cumbersome, however, withnocorresponding
increase in generality or clarity. Indeed, if local environmental impacts play a small role in
the ﬁrm’s objectives, then a strictly declining objective function may represent the ﬁrm’s
preferences better than woulda U-shapedfunction. Thus, we have chosen a parsimonious
formulation that we believe captures the essence of the situation.
Astroturf: Interest Group Lobbying and Corporate Strategy 573
3. Astroturf
In this section, we consider the corporate strategy of astroturf lobbying,
in which the ﬁrm subsidizes the lobbying cost of a sympathetic special
interest group after the ﬁrm learns the state of the world. Subsidy
payments are made instates inwhichthe special interest groupnormally
would not lobby,
20
and the resulting artiﬁcially induced lobbying is
called astroturf lobbying. This strategy involves covertly supporting an
interest group whose bias is negative; astroturf is thus a form of costly
state falsiﬁcation.
21
As we noted in section 1, the most common exam-
ples of astroturﬁng involve the hiring of public relations or lobbying
ﬁrms to stimulate artiﬁcial grassroots campaigns. The subsidies may be
direct monetary payments, but they often involve providing free use
of the ﬁrms’ phone bank equipment and personnel. In the latter case,
the employees of the public relations ﬁrm will pose as members of the
grassroots group when they make phone calls or send faxes.
22
The ex-post nature of the ﬁrm’s subsidy payment (i.e., the fact it is
made after the ﬁrm learns the state) is an important characteristic and
distinguishes the strategy fromthe bear hug strategy, which involves an
ex-ante contract with the SIG. In many situations, the ﬁrmwill knowthe
true state of the world prior to making its project proposal. For example,
the literature onenvironmental justice argues that ﬁrms take community
characteristics and impacts into account when deciding where to site
industrial plants.
23
In the context of health care reform, pharmaceutical
companies presumably know in advance the true extent to which they
will cut research and development (R&D) spending if Medicaid reforms
reduce the prices paid by the states for prescription drugs.
We will assume that conditions (4) through (6) hold, so an in-
formative equilibrium exists. In this equilibrium, the negative-biased
SIG lobbies in the low state but not in the high state. Can the ﬁrm
use astroturf lobbying to raise its expected payoff relative to its payoff
when the SIG engages in truthful lobbying behavior? Recall that for
astroturf lobbying to work, the ﬁrm’s subsidy to the negative-biased
SIG must occur ex post and must be hidden from the DM. Although
we assume that the DM cannot observe the ﬁrm’s subsidy payment
20. Alternatively, the ﬁrmcansubsidize anopposingSIGnot tolobbywhenit normally
would. The formal analysis is the mirror image of that discussed in the text. However, we
are interested particularly in providing a positive political economy explanation for the
observed behavior of astroturf lobbying, so we will limit our analysis to that case, which
involves a negative-biased SIG.
21. Crocker and Tennyson (1999) study costly state falsiﬁcation in the context of
insurance and show that the optimal insurance contract typically involves a strictly
positive amount of falsiﬁcation.
22. For an example, see Craig (2002).
23. See Taylor (1992) or Greer and Harding (1993).
574 Journal of Economics & Management Strategy
costlessly, it is clear from our discussion in section 1 that policymakers
are aware of the possibility of the astroturf lobbying strategy. Thus, we
assume the DM can expend resources to create an auditing staff that
may be able to determine whether a subsidy in fact did occur. Given
the deluge of lobbying activity to which politicians are exposed, we
will assume that resource constraints prevent the DM from hiring an
auditingstaff withthecapacitytoexamineall lobbyists. Instead, weview
the DM as committing a certain level of effort and resources to create
an auditing staff that can audit a fraction α of the lobbying messages
received. We will suppose that if a given lobbyist is selected for an audit,
the DM obtains conclusive information about whether a subsidy was
conferred. The (ﬁxed) cost of hiring an auditing staff that can audit each
SIG with probability α is c(α), where c

(α) > 0 and c

(α) > 0. We also
will assume that lim
α→0
c

(α) = 0 and lim
α→1
c

(α) = ∞, which assures
aninterior solution. Inthe analysis to follow, then, we interpret the DM’s
auditing process as reﬂecting a precommitment to audit each SIG with
probability α.
There are two possible types of equilibria with auditing: one in
which astroturf does not occur, and one in which it does.
3.1 The “No-Astroturf” Equilibrium
In this equilibrium, the DM believes (correctly) that if the SIG lobbies
then the state is θ
L
, and if the SIG does not lobby then the state is θ
H
. To
ensure that these conditions hold, however, the DM must audit the SIG
when it lobbies in order to eliminate the ﬁrm’s incentives to astroturf.
Assuming the ﬁrm does not engage in astroturf lobbying, the DM can
infer correctly the state of the world and sets the optimal policy for each
state. Let the DM’s equilibrium audit probability in this case be α
NA
.
Thus, the DM’s expected payoff is G
NA
= −c(α
NA
), since aside from the
cost of auditing, setting the correct policy generates a loss of zero in both
states.
In order for the no-astroturf equilibrium to exist, it must be
unproﬁtable for the ﬁrm and the SIG to engage in astroturf. Astroturf
lobbyingwouldconsist of the ﬁrmcovertlypayingthe SIGtolobbyinthe
high state. The smallest amount the SIGwould accept is S
NA
(δ, l), where
the superscript NA indicates that we are examining the no-astroturf
equilibrium. The amount the ﬁrm must pay the SIG is determined by
what it will take in the high state to make the SIG indifferent between
lobbying and getting the low policy if it is not audited [which occurs
with probability (1 −α
NA
)] and not lobbying and getting the high policy
for certain. Formally, S
NA
(δ, l) is determined by
−(1 −α
NA
)(θ
L
−θ
H
−δ)
2
+ S
NA
(δ, l) −l
= −(1 −α
NA
)(θ
H
−θ
H
−δ)
2
,
(7)
Astroturf: Interest Group Lobbying and Corporate Strategy 575
which yields
S
NA
= l +(1 −α
NA
)(θ
H
−θ
L
)(2δ +θ
H
−θ
L
).
Note that since the DM believes she is playing the no-astroturf
equilibrium, lobbying leads the DM to believe the state is really θ
L
(assuming an audit does not prove otherwise) and hence to set the low
policy. Clearly S
NA
(δ, l) is less than l, since the SIG derives direct utility
from obtaining θ
L
. (Henceforth, we suppress the dependence of S
NA
on
δ and l for notational simplicity.) Because we are considering the case
where δ < 0, S
NA
is smaller the more biased is the SIG.
Conditional on the DM’s commitment to an audit policy and on
the DM’s recognition that he is playing the no-astroturf equilibrium,
the ﬁrm must prefer not to astroturf in state θ
H
. (It need not engage
in astroturf in state θ
L
, as the SIG lobbies by assumption.) The ﬁrm’s
proﬁts if it does not astroturf are π
NA
(θ
H
) = −βθ
2
H
. If it were to astroturf,
by paying the SIG an amount S
NA
, its expected proﬁts would be
¯ π
A
(θ
H
) = α
NA
_
−βθ
2
H
_
+(1 −α
NA
)
_
−βθ
2
L
_
− S
NA
.
Thus, with probability α
NA
, the DM conducts an audit, and the audit
reveals that the ﬁrm engaged in astroturf; the DM then sets a high level
of policy. With probability 1 −α
NA
the DM does not audit; since the
DM believes the no-astroturf equilibrium is being played and has no
evidence to the contrary, she sets a low level of policy.
A“No-Astroturf” equilibriumrequires −βθ
2
H
> α
NA
(−βθ
2
H
) +(1 −
α
NA
)(−βθ
2
L
) −S
NA
. This can be rewritten as
(1 −α
NA
)β
_
θ
2
H
−θ
2
L
_
− S
NA
< 0. (8)
In order to enforce the no-astroturf equilibrium, the DM must
choose α
NA
to make inequality (8) hold. This implies
α
NA
≥ 1 −
S
NA
β
_
θ
2
H
−θ
2
L
_. (9)
Note that as S
NA
becomes smaller and as β or the gap between θ
H
and θ
L
becomes larger, the DMmust audit with a higher probability in order to
maintainthe “No-Astroturf ”equilibrium. Infact, as S
NA
goes tozero, the
cost of auditing becomes prohibitive, and the no-astroturf equilibrium
fails to exist.
3.2 The “Astroturf” Equilibrium
Next we consider the existence of an alternative equilibrium in which
it is common knowledge that the DM does not audit enough to deter
astroturf lobbying. Inthis equilibrium, the SIGalways lobbies regardless
576 Journal of Economics & Management Strategy
of the state of the world: in the low state the SIG itself is motivated to
lobby, while in the high state the ﬁrm pays the SIG to lobby. As a result,
the DM always sets the average policy unless an audit catches the ﬁrm
engaging in astroturf, in which case the DM knows the state is θ
H
and
sets a stringent policy. We will assume that if the SIG does not lobby—
which is an out-of-equilibrium event—then the DM believes the state
must be θ
H
and sets p = θ
H
. This off-equilibriumbelief seems reasonable
given that the SIG’s incentive to lobby is weaker in the high state than
in the low state.
Let us consider the SIG’s optimal lobbying strategy in each state
of the world. Suppose the state is θ = θ
L
. The SIG obtains policy p =
(θ
H
+θ
L
)/2 if it lobbies and policy p = θ
H
if it does not. Lobbying is
worthwhile if −((θ
H
+θ
L
)/2 −θ
L
−δ)
2
−l ≥ −(θ
H
−θ
L
−δ)
2
, which can
be rewritten as
l ≤
¯
l

≡
(θ
H
−θ
L
)
2
_
−2δ −
(θ
H
−θ
L
)
2
_
. (11)
If both (10) and (11) hold, then in equilibriumthe SIG’s optimal strategy
is to lobby only in the low state (unless it is subsidized by the ﬁrm
to lobby in the high state).
24
Figure 2 illustrates the curves
¯
l

and l

in
relation to the curves
¯
l and l derived in section 2. The mathematical
formulation of the curves differs now because in the simple model, if
the SIG lobbies it expects the DM to set the policy it advocates, whereas
in the astroturf equilibrium, lobbying yields only the average policy.
As a result, lobbying is less productive for the SIG, and the curves for
the astroturf equilibriumeffectively are “stretched“ to the right, though
they maintain the same general shape as the original curves.
Assuming l ∈ [l

,
¯
l

], how much must the ﬁrm subsidize the SIG
in order to induce it to accept astroturf funding? Let S
A
(δ, l) be the
minimum the SIG will accept, which is deﬁned by the equality
−α
A
(θ
H
−θ
H
−δ)
2
−(1 −α
A
)((θ
H
+θ
L
)/2 −θ
H
−δ)
2
−l + S
A
(δ, l)
= −(θ
H
−θ
H
−δ)
2
.
24. Note that l

> 0 and
¯
l

> 0 since δ < −(θ
H
−θ
L
)/2.
Astroturf: Interest Group Lobbying and Corporate Strategy 577
a
l
2
l
l
_
Uninformative
equilibrium
Uninformative
equilibrium
Informative
equilibrium:
negative-biased
SIG lobbies only
when =
L
l’
_
l’
FIGURE2. EXISTENCE OF ASTROTURF EQUILIBRIUM
For anysubsidygreater thanS
A
(δ, l), the SIGis willingtoaccept the
payment and lobby, obtaining the average policy, rather than choosing
to not lobby, thereby obtaining the high policy. Clearly, S
A
(δ, l) < l,
since the ﬁrm prefers the average policy to the high policy. (Hence-
forth, we suppress the dependence of S
A
on δ and l for notational
simplicity.)
For the region where l ∈ (l

,
¯
l

), the astroturf equilibrium exists if
the ﬁrmﬁnds it proﬁtable to subsidize the SIG’s lobbying activity when
the state is high. If θ = θ
H
and if the ﬁrm chooses to engage in astroturf
by subsidizing the SIG with a payment of S
A
, then
¯ π
A
(θ
H
) = α
A
_
−βθ
2
H
_
+(1 −α
A
)
_
−β
_
θ
H
+θ
L
2
_
2
_
− S
A
.
The ﬁrm’s expected proﬁts reﬂect the fact that the stringent policy
is imposed only if an audit reveals that astroturf lobbying occurred;
this happens with probability α
A
. Otherwise, the DM sets the average
policy since she believes (correctly) that the astroturf equilibrium is
being played.
If the ﬁrm did not pay for astroturf lobbying when the state was
θ = θ
H
, then the SIG would not lobby. As noted already, this is out-of-
equilibrium behavior, given that the DM believes they are playing the
astroturf equilibrium, and we assume that in this event the DMbelieves
the state is θ
H
and sets p = θ
H
. As a result, the ﬁrm earns π = −βθ
2
H
. To
578 Journal of Economics & Management Strategy
ensure this deviation from equilibrium play does not occur, it must be
the case that ¯ π
A
(θ
H
) > −βθ
2
H
. That is, an astroturf equilibrium requires
α
A
_
−βθ
2
H
_
+(1 −α
A
)
_
−β
_
θ
H
+θ
L
2
_
2
_
− S
A
+βθ
2
H
> 0, (12)
which implies
1 −α
A
4
β(3θ
H
+θ
L
)(θ
H
−θ
L
) > S
A
. (13)
Since S
A
< l ≤
¯
l

, (14)
which can be rewritten as
β ≥
3(θ
H
−θ
L
) −4δ
(1 −α
A
) (3θ
H
+θ
L
)
. (15)
Thus, we obtain the following lemma.
Lemma 1: For β satisfying inequality (15), the ﬁrmﬁnds it proﬁtable to fund
the SIG to engage in astroturf lobbying.
Lemma 1 states that if the ﬁrm’s payoff function is sufﬁciently
concave, then it is proﬁtable to engage in the astroturf strategy, i.e.,
to subsidize the SIG in the high state of the world even when it faces
a positive probability of detection. In doing so, the ﬁrm beneﬁts from
obtainingtheaveragepolicyinthehighstate(as longas anaudit does not
detect the subsidy), although it does sacriﬁce the possibility of obtaining
p = θ
L
(obtaining the average policy instead) when the state of the world
is low.
25
Finally, to determine whether an astroturf equilibrium exists, we
needtocheckwhether theDMwouldprefer todeter astroturf andshift to
25. Since the ﬁrm’s beneﬁt from astroturf is simply that it obtains the average policy
(except when an audit catches the ﬁrm engaging in astroturf lobbying), the reader may
wonder why the ﬁrm instead does not contract with the SIG never to lobby. The latter
strategy—if feasible—would appear to generate greater joint surplus, since it avoids the
cost of lobbying and also avoids the risk that the DMsets the high policy when the ﬁrmis
caught engaging in astroturf. However, such a contract is not feasible under the conditions
in which astroturf lobbying is used, i.e., when the ﬁrm knows the state is high. A contract
paying the SIGnever to lobby must be written before the ﬁrmlearns the state of the world,
since if the state is lowthen the ﬁrmlikes the informative equilibrium, and would not pay
the SIG to stay home and to eschew lobbying.
Astroturf: Interest Group Lobbying and Corporate Strategy 579
the no-astroturf equilibrium. The DM’s expected utility in the astroturf
equilibrium is
G
A
=
1
2
_
α
A
(0) +(1 −α
A
)
_
−
_
θ
H
+θ
L
2
−θ
L
_
2
__
+
1
2
_
α
A
(0) +(1 −α
A
)
_
−
_
θ
H
+θ
L
2
−θ
H
_
2
__
−c(α
A
)
= −(1 −α
A
)
(θ
H
−θ
L
)
2
4
−c(α
A
).
(16)
Given our assumptions about c(α), an interior solution is assured.
26
Alternatively, in the no-astroturf equilibrium, the DM always sets the
optimal policyandhence incurs nopolicyloss but must expendauditing
resources when lobbying occurs, obtaining a net utility G
NA
= −c(α
NA
).
The DM prefers the astroturf equilibrium if G
A
> G
NA
, that is, if
−(1 −α
A
)
(θ
H
−θ
L
)
2
4
−c(α
A
) > −c(α
NA
). (17)
It is evident that the astroturf equilibrium is preferred by the DM if α
NA
is very high and/or the audit cost function is highly convex. Thus, we
have the following proposition:
Proposition 1: An astroturf equilibrium exists when conditions (4), (10),
(11), (15), and (17) hold.
In summary, we have demonstrated that a ﬁrm may be able to
engage proﬁtably in the practice of astroturﬁng and that the DM may
be unable to prevent this.
27
Taken as a whole the results of this section
lead to the following proposition.
Proposition 2: The public decision-maker would be better off if the ﬁrm
were required to disclose publicly its expenditures on astroturf lobbying.
Proof . Suppose the conditions inProposition1 hold. If public disclosure
of expenditures on astroturf lobbying were required, then the DM
always would be able to infer the state correctly, to set the optimal
policy for each state, and to obtain expected payoff G
0
= 0. If the
possibility of astroturf lobbying exists, one of two equilibria will result.
26. The DM’s auditing decision in the astroturf equilibriumis determined by the ﬁrst-
order condition ∂G
A
/∂α = (θ
H
−θ
L
)
2
/4 −c

(α
A
) = 0.
27. As mentioned earlier, if the ﬁrm faces a positive-biased SIG, then it could be
proﬁtable to the SIG not to lobby in the high state, although this practice properly cannot
be termed astroturf lobbying. It is not incentive compatible for the ﬁrm to pay a negative-
biased SIG not to lobby, since in the low state the ﬁrm prefers to have the SIG lobby for a
lax policy.
580 Journal of Economics & Management Strategy
In the no-astroturf equilibrium the DM’s expected payoff is G
NA
=
−c(α
NA
)/2 < G
0
, and in the astroturf equilibrium the DM’s expected
payoff is G
A
= −(1 −α
A
)(θ
H
−θ
L
)
2
/4 −c(α
A
) < G
0
.
Proposition 2 illustrates why decision-makers may want to pass
laws requiring the reporting of funding devoted to astroturf lobbying.
Interestingly, this desire will exist even when efforts aimed at detecting
astroturf are successful enough to deter the activity, since the DM must
expend real resources on auditing to deter astroturf lobbying and hence
receives a strictly negative payoff even in the no-astroturf equilibrium.
A key feature of astroturf lobbying is its covert nature. On
December 19, 1995, President Bill Clinton signed into law the Lobbying
Disclosure Act of 1995, establishing new registration and reporting
requirements for lobbyists workingfor corporations, charities, andother
nonproﬁt organizations engaged in efforts to inﬂuence legislative and
executive branch decisions. The 1995 act was the ﬁrst major legis-
lation on lobbying in nearly 50 years and was designed to provide
transparency in the lobbying process. Early drafts of the Lobbying
Disclosure Act included provisions requiring the registration of ﬁrms
engaged in astroturf lobbying and the reporting of the expenditures
made on those actions. Those provisions, however, failed to make it
out of committee. As the bill’s sponsor, Senator Carl Levin, testiﬁed
before a House committee considering the bill: “Every reference to
grass roots lobbying—and even to paid efforts to stimulate artiﬁcial
grass roots lobbying—has been deleted from the bill . . . I am personally
disappointed that we were unable to do anything to address the issue of
a form of grassroots lobbying referred to as astroturf lobbying, in which
lobbyists hire professional experts torunphone banks andgenerate mail
in support of their efforts. In my view, these paid, professional astroturf
campaigns bear nothing in common with the genuine grassroots activ-
ities . . . I . . . hope that the House will reconsider the disclosure of such
lobbying. . . ”
28
Thus, a signiﬁcant and growing aspect of the lobbying process
remains obscured from public view. Even if disclosure were required,
however, it would not be a panacea. In the following two sections we
explore two alternative corporate strategies that also impede the ability
of special interest groups to provide information to the decision-maker.
These strategies involve overt rather than covert actions on the part of
the ﬁrm and therefore would be unaffected by any public reporting
requirements.
28. Testimony of Senator Carl Levin, Committee on the Judiciary, Subcommittee on
the Constitution, U.S. House of Representatives, September 7, 1995.
Astroturf: Interest Group Lobbying and Corporate Strategy 581
4. The Bear Hug
In this section we explore the use of publicly observable payments by
the ﬁrm that are aimed at inﬂuencing the lobbying behavior of special
interest groups. We showthat the ﬁrmmaywishtomake these payments
to SIGs with either a negative or a positive bias and that the ﬁrm can
pay either the SIG never to lobby, regardless of the state, or always to
lobby. For simplicity, we focus on the case of a SIG with a positive bias.
This case sheds light on the seemingly oddsituation in which an interest
groupsuchas Greenpeace accepts funding for its communicationefforts
from a large oil company such as Shell. We begin our analysis under
the assumption that the ﬁrm and the SIG can commit credibly not to
renegotiate a contract governing the SIG’s lobbying behavior. In section
4.2, we turn to the case where renegotiation is possible and study the
restrictions this places on the use of the bear hug strategy.
4.1 Contracting with Commitment
We assume there exists a positive-biased SIG for which conditions (1)
through (3) hold.
29
Then, as we have shown, there exists an equilibrium
in which the SIG’s lobbying activity fully reveals to the DM the true
state of the world. In this subsection we explore the ﬁrm’s relationship
withthe SIGunder these circumstances. We assume the ﬁrmcancommit
crediblytoa contract withthe SIGtoadopt a particular lobbyingstrategy
and examine when such a contract is incentive compatible for both
parties. Note that since the state of the world is not veriﬁable in court,
the contract cannot condition upon the state.
Given the convexity of the ﬁrm’s payoff function, the bear hug
contract is effectively a form of insurance against adverse policy out-
comes, since the ﬁrm receives the average policy p = (θ
H
+θ
L
)/2 with
certainty rather than a randomization between p = θ
L
and p = θ
H
. The
following lemma provides an upper bound on the amount the ﬁrm is
willing to pay for this insurance.
Lemma 2: If conditions (1) through (3) or (4) through (6) hold, then the ﬁrm
is willing to pay up to β(θ
H
−θ
L
)
2
/4 to induce a switch from an informative
to an uninformative equilibrium.
Proof . In an informative equilibrium, the ﬁrm’s expected payoff is
E(F) = −βθ
2
L
/2 −βθ
2
H
/2 = −β(θ
2
L
+θ
2
H
)/2. Alternatively, in an uninfor-
mative equilibrium, it is optimal for the DMto set a policy simply based
on its prior, in which case the ﬁrm’s payoff is F = −β(θ
H
+θ
L
)
2
/4. The
difference between these two payoffs is β(θ
H
−θ
L
)
2
/4 > 0.
29. All of our results in this section also go through if the SIG is negative-biased.
582 Journal of Economics & Management Strategy
The intuition behind the Lemma 2 is straightforward. The ﬁrm’s
payoff is concave with respect to the stringency of policy, so Jensen’s
Inequality implies that the ﬁrm prefers the average policy to a lottery
between the low and high policies. By paying the SIG to take the same
action in both states of the world, the ﬁrm destroys the informative
equilibriumand reduces the DMto adopting the policy p = (θ
L
+θ
H
)/2,
its optimal choice when the state of the world is unknown. The bear hug
strategy is thus a form of signal jamming, similar in spirit to the analysis
of Fudenberg and Tirole (1986) in the context of predation.
30
Leema 2
identiﬁes the ﬁrm’s gross beneﬁt from using the bear hug strategy to
shift from an informative to an uninformative equilibrium. This can be
accomplishedmost cheaply by paying the SIGnever to lobby. Equivalent
results can be obtained, however, if the ﬁrm subsidizes the SIG always
to lobby, e.g., by undertaking actions such as funding the reporting
of information by environmental or local community organizations,
covering the SIG’s travel costs for appearing before the decision-maker,
and soforth. Such private-sector funding appears to be increasingly
common. For example, one major national environmental group has
adopted a policy of accepting funding from corporations to participate
in regulatory negotiations.
31
While the second approach is more costly,
it might be more palatable politically for a SIG that does not want to
appear to be bribed into silence by corporations normally perceived as
its adversaries. In a related vein, the SIGmay receive some (unmodeled)
beneﬁts from lobbying that might lead it to prefer being subsidized to
lobby rather than being paid to stay home. For example, SIGs may ﬁnd
that the greater media coverage that comes with lobbying has a positive
effect on their fund-raising efforts.
Even when the ﬁrm wishes to offer the bear hug, the SIG must be
willing to accept the ﬁrm’s support. Consider ﬁrst the case where the
ﬁrm pays the SIG never to lobby. This will be acceptable to the SIG if it
prefers to obtain the average policy outcome plus a subsidy S
B
rather
than incur the lobbying cost l in the high state to deliver credibly the
report θ
H
. Mathematically, the SIG must prefer .5[−((θ
H
+θ
L
)/2 −θ
H
−
δ)
2
] +.5[−((θ
H
+θ
L
)/2 −θ
L
−δ)
2
] +S
B
to −δ
2
−l/2. Rearranging terms,
we ﬁnd the SIG is willing to accept subsidy S
B
if
S
B
> (θ
H
−θ
L
)
2
/4 −l/2. (18)
30. Note that the lobbying activities of a negatively biased SIGalso can informthe DM
of the true state; in this case, the SIG only lobbies when the state is low. Since the ﬁrm
prefers that the DM not know the state of the world, signal jamming through the use of
the bear hug can be valuable for a negatively biased SIG as well as one with a positive
bias.
31. Private communication with Dallas Burtraw, Senior Fellow at Resources for the
Future, December 20, 2002.
Astroturf: Interest Group Lobbying and Corporate Strategy 583
It also is conceivable that for political reasons the SIGwouldprefer
not to be seen accepting a “bribe“ that requires it to eschew lobbying
on a particular issue. An alternative is for the ﬁrm to subsidize the SIG
always to lobby. This is more expensive for the SIG by the amount l, so
the subsidy it demands then will be
S
B
> (θ
H
−θ
L
)
2
/4 +l/2. (19)
Comparing the foregoing conditions to the ﬁrm’s proﬁtability
condition S
B
≤ β(θ
H
−θ
L
)
2
/4, we are led immediately to the following
proposition.
Proposition 3: Assume conditions (1) through (3) or (4) through (6) hold.
The bear hug is incentive compatible (i.e., proﬁtable to the ﬁrm and accepted by
the SIG) if (a) β > 1 −2l/(θ
H
−θ
L
)
2
and the ﬁrm pays the SIG never to lobby;
or (b) β > 1 +2l/(θ
H
−θ
L
)
2
and the ﬁrm pays the SIG always to lobby.
Clearly β ≥ 1 is a sufﬁcient condition for the bear hug to be
incentive compatible when the ﬁrm pays the SIG never to lobby. Both
parties wouldprefer this tothe bear huginwhichthe SIGalways lobbies.
Nevertheless, the bear hug in which the SIG always lobbies is also
incentive compatible for large enough β and may be used if political
considerations (unmodeled here) make it unacceptable for the SIG to
accept a payment to eschew lobbying.
32
The effects of the bear hug on the DM’s expected utility are shown;
Proposition 4.
Proposition 4: The bear hug strategy reduces the public decisionmaker’s
expected payoff relative to the full information case.
Proof . Without the subsidy, the DM’s expected utility is E(G) = 0. The
SIGcanbe relieduponto reveal the true state, andthe DMthus cantailor
policy perfectly to each state of the world. When the ﬁrmsubsidizes the
SIG, the DM’s expected utility is E(G
BH
) = (1/2)[−((θ
L
+θ
H
)/2 −θ
L
)]
2
+
(1/2)[−((θ
L
+θ
H
)/2 −θ
H
)]
2
= −(θ
H
−θ
L
)
2
/4 < 0. Hence the DMis worse
off when the ﬁrm supports the SIG.
The proposition shows that under conditions (1) through (3) or (4)
through(6), the DMis strictly worse off whenthe ﬁrmprovides ﬁnancial
support to the SIG. While signal jamming is proﬁtable for the ﬁrm and
may be accepted by the SIG as a way to economize on lobbying costs,
32. Inthetext wehaveconsideredonlytheexistenceof pure-strategyequilibria. Mixed-
strategy equilibria in which the ﬁrm randomizes its subsidy offers also are possible and
may be more proﬁtable for the ﬁrm. A proof is available from the authors upon request.
Note that in a mixed strategy equilibrium, the DM does not observe directly whether the
subsidy took place; rather, it simply believes (perhaps based on the ﬁrm’s past behavior)
that the ﬁrm is engaging in mixing behavior.
584 Journal of Economics & Management Strategy
it is unwelcome to the decision-maker because it prevents the optimal
matching of policy to circumstances.
There are three potential issues that maylimit the conditions under
which the bear hug is a viable strategy. First, the strategy must apply
to situations where the true state of the world is unknown to the ﬁrm
at the time the subsidy is granted. The reason for this restriction is as
follows. If the ﬁrm knew the true state of the world was θ
L
, it would
prefer that the conditions of truthful revelation held. These conditions
would require that no subsidy be given, so the SIG eschews lobbying.
If the ﬁrm knew the state was θ
H
, however, it would have incentives
to pay the SIG publicly not to lobby, so as to undermine the DM’s
ability to infer the state. Thus, if the ﬁrmknewthe true state, its subsidy
would be state dependent, and the DM could determine the true state
simply by observing whether the subsidy payment had been made. In
consequence, the bear hug strategy is more likely to apply to situations
with true scientiﬁc uncertainty or situations with a risk of accidents than
to situations where the ﬁrm knows the state in advance. The bear hug
thus can be seen as a kind of insurance policy against worst-case policy
outcomes.
The second issue affecting the viability of the bear hug is that the
ﬁrm must be able to contract directly on the SIG’s lobbying actions on a
particular issue. If this is infeasible for political or other reasons, thenthe
ﬁrmmust ensure that its subsidy is used to subsidize the SIG’s lobbying
costs on the particular issue of concern. Thus, there may be difﬁculties
implementing the bear hug strategy if the SIG operates in multiple
policy arenas. A general-purpose gift to an environmental group may
go simply to subsidize the group’s ﬁxed costs but may not guarantee
that extra funds are devoted to lobbying about dioxin. The ﬁrmmust be
able to tie the gift to SIG activity in a particular issue area. This might
be done by providing the SIG with a forum in which it can express its
views. For example, in the paper industry example, the environmental
group could be invited to participate in a paper industry forum, at the
industry’s expense, thereby targeting the support toward a particular
issue.
The third issue that constrains the viability of the bear hug is that
the parties may have incentives to renegotiate the contract after they
learn the state of the world, which may undermine the effectiveness of
the strategy. We discuss this issue in detail in the following subsection.
4.2 Renegotiation of the Bear Hug
To this point, we have assumed that the ﬁrm can commit credibly to a
contract with the SIG in which the SIG is rewarded on the basis of its
Astroturf: Interest Group Lobbying and Corporate Strategy 585
lobbying behavior, although the contract cannot be conditioned on the
(unveriﬁable) state of the world. Nowwe turntothe questionof whether
such a contract would remain viable if renegotiation were possible. A
maintained assumption throughout our analysis of the bear hug is that
the ﬁrm’s contract with the SIG is observable by the DM, so we assume
that any renegotiation of that contract also is observable. As a result,
if incentives for renegotiation differ across states of the world, the DM
can infer the state from the parties’ renegotiation actions. As might be
expected, incentives for renegotiation depend upon β, δ, and l. These
parameters determine the costs and beneﬁts of renegotiation for the
ﬁrm and the SIG. We ﬁnd that the possibility of renegotiation restricts
the set of parameters for which the bear hug is a viable contract.
To illustrate the sort of analysis involved, we begin with the case of
a contract paying a negative-biased SIG always to lobby and show that
such a contract is always vulnerable to renegotiation and hence cannot
restrain the SIG’s lobbying activity credibly. We then present briefer
discussions of a contract with a negative-biased SIG never to lobby and
contracts with a positive-biased SIG.
Recall that in an informative equilibrium with a negative-biased
SIG, the SIG lobbies if the state is low and not otherwise. The bear hug
contract we consider here involves the ﬁrm paying the SIG to lobby in
both states and the DM imposing the average policy. The DM believes
that in the off-equilibrium event that the SIG does not lobby, then the
state is high.
33
Do the parties want to rip up the contract ex post and
renegotiate?
When θ = θ
L
, both parties gain if the state is revealed to the DM,
and he sets a corresponding level of policy. This can be accomplished if
the ﬁrmpays the SIGthe agreed-uponsubsidylevel, andthenthe parties
tear up the contract. With the contract out of the way, the informative
equilibrium becomes feasible once again, and we assume the game
reverts to it. Since the state is low, the SIG chooses to lobby, and the
DM sets the low policy. The net gain to the SIG is
−(θ
L
−θ
L
−δ)
2
+((θ
H
+θ
L
)/2 −θ
L
−δ)
2
= (θ
H
−θ
L
)
2
/4 −δ(θ
H
−θ
L
),
while the gain to the ﬁrm is
−βθ
2
L
+β(θ
H
+θ
L
)
2
/4 = β(θ
H
+3θ
L
)(θ
H
−θ
L
)/4.
33. If the off-equilibrium belief were that the state is low, then the bear hug contract
we are considering would not be an equilibrium, even if the parties had full commitment
power.
586 Journal of Economics & Management Strategy
Renegotiation will occur as long as the increase in joint surplus is
positive, i.e., if
β(θ
H
+3θ
L
)(θ
H
−θ
L
)/4 +(θ
H
−θ
L
)
2
/4 −δ(θ
H
−θ
L
)
= (θ
H
−θ
L
)[β(θ
H
+3θ
L
) +(θ
H
−θ
L
) −4δ]/4 > 0.
Since δ < 0, this expression is always true, andhence renegotiation
always will occur in the low state.
34
If renegotiation does not occur
in the high state, then the DM can infer the state by observing the
renegotiationbehavior of the parties. Conversely, if renegotiationoccurs
in both states, then there is no point to writing the original contract.
Either way, a bear hug contract paying a negative-biased SIG always to
lobby is undermined by renegotiation.
Matters are more complicated somewhat if the ﬁrmcontracts with
the negative-biased SIG never to lobby. Now, in state θ
L
, the parties
prefer a low policy to the average one, but lobbying resources must be
expended in order to achieve it. As a result, renegotiation will occur in
the low state unless l is sufﬁciently large, i.e., unless
l > (θ
H
−θ
L
)[β(θ
H
+3θ
L
) +(θ
H
−θ
L
) −4δ]/4.
Thus, for lobbying costs below this threshhold, a bear hug con-
tract that pays the negative-biased SIG always to stay home is not
renegotiation-proof. The ﬁrm desiring to inﬂuence the SIG’s behavior
must utilize astroturf lobbying (or self-regulation) instead of the bear
hug.
Similar analyses can be conducted for bear hug contracts with a
positive-biased SIG. The joint surplus from renegotiation is lower than
for the negative-biased SIG, though, since the parties prefer different
policy outcomes. For example, consider a bear hug contract with the
positive-biased SIG always to lobby. In state θ
L
, the ﬁrm desires to
renegotiate the contract, so as to obtain the low policy instead of the
average policy. In contrast, the SIG prefers the average policy, other
things equal, although renegotiation does offer the beneﬁt that the SIG
does not incur the lobbying cost l. The increase in joint surplus from
renegotiation can be shown to be
(θ
H
−θ
L
)
_
(β +1)θ
H
+(3β −1)θ
L
4
−δ
_
+l.
Clearly renegotiation will only be jointly beneﬁcial if β or l is large
enough or if δ is small enough. Note the contrast with the result for the
34. Note that in this type of bear hug contract, incentives for renegotiation do not
depend on l. Since the SIG will lobby whether or not the contract is in force, l is incurred
regardless of renegotiation.
Astroturf: Interest Group Lobbying and Corporate Strategy 587
negative-biased SIG, in which case the parties always renegotiate this
type of contract, regardless of parameter values. This type of reasoning
holds also for a bear hug paying the SIG never to lobby: in both cases,
the fact that the ﬁrmandthe SIGhave differing preferences over policies
limits the value of renegotiation. In summary, bear hug contracts with a
positive-biased SIG are less vulnerable to renegotiation, implying that
they are more likely to be observed in practice.
5. Self-Regulation
Each of the strategies we have considered thus far has limitations.
Astroturf is possible only when the ﬁrm already knows the state of the
world and when ﬁrms are not required to disclose their expenditures
publicly on this form of lobbying. The bear hug requires commitment
power and may be undermined by renegotiation. In this section, we
study the possibility that the ﬁrmmay be able to alter the SIG’s lobbying
behavior by reducing the severity of the high state, i.e., reducing θ
H
,
through voluntary improvements made ex ante. This might be done,
for example, through design measures for a new facility that reduce the
impact of worst-case outcomes. If the DMhas the power to holdthe ﬁrm
to the design it proposes, such actions constitute credible commitments.
The basic intuition here is that if the difference between the
high and low states is sufﬁciently small, then the SIG will have little
motivation to lobby the DM. Hence, self-regulation by the ﬁrm may
induce the SIG to eschew lobbying, with the result that the DM sets the
average policy, and the ﬁrm’s proﬁts rise by β(θ
H
−θ
L
)
2
/4, as shown
in Lemma 2. Baron (2001) refers to such proﬁt-driven self-regulation as
“strategic corporate social responsibility,“ in contrast to corporate social
responsibility that is motivated altruistically.
Recall the notation a = θ
H
−θ
L
, and denote by a
0
the initial gap
between the states. We consider self-regulation as a voluntary reduction
in θ
H
on the part of the ﬁrm, cutting a from a
0
to a
1
. That is, the ﬁrm’s
voluntary action reduces the severity of the DM’s optimal policy in the
highstate of the world. Thus, if the ﬁrmreduces θ
H
fromθ
L
+a
0
toθ
L
+a
1
and if this induces the SIG to eschew lobbying, then the DM sets the
average policy, i.e., p = θ
L
+a
1
/2, and the ﬁrm’s payoff is F
SR
= −β(θ
L
+
a
1
/2)
2
= −β(θ
2
L
+a
1
θ
L
+a
2
1
/4).
35
If the ﬁrm took no action and if the SIG
revealed the true state through its lobbying decisions, then the ﬁrm’s
expected payoff would be F
0
= −β(θ
2
H
+θ
2
L
)/2 = −β(θ
2
L
+a
0
θ
L
+a
2
0
/2).
The net beneﬁt tothe ﬁrmis
SR
(a
1
) = F
SR
−F
0
= β(a
0
−a
1
)θ
L
+β(2a
2
0
−
a
2
1
)/4 > 0.
35. We could allow the ﬁrm to reduce both θ
H
and θ
L
, and as long as the former is
reduced more than the latter, all our results in this section still would go through.
588 Journal of Economics & Management Strategy
Giventhat the payoff functionfor the ﬁrmis F = −βp
2
, howshould
we represent the cost of achieving a? If the ﬁrm were forced to comply
with a policy of p = θ
H
, the cost difference between a
0
and a
1
would be
k(a
1
) = −β(θ
L
+a
1
)
2
−(−β(θ
L
+a
0
)
2
) = β(2θ
L
+a
0
+a
1
)(a
0
−a
1
). In or-
der to be consistent with this payoff function, we will assume that the
cost to the ﬁrm of achieving such a reduction is k(a
1
) = β(2θ
L
+a
0
+
a
1
)(a
0
−a
1
). Thus, we allow the ﬁrm no extra beneﬁt from engaging in
unmandated reductions in θ
H
.
36
Combining the beneﬁts andthe cost of voluntary action (assuming
theactionis sufﬁcient torender theSIG’s lobbyingchoiceuninformative)
gives a net increase in proﬁts from voluntary action of
V(a
1
) =
SR
(a
1
) −k(a
1
) =
3
4
βa
2
1
−
1
2
βa
2
0
−βθ
L
(a
0
−a
1
).
Recalling that a
1
< a
0
, it is easy to see that V(a
1
) is positive for a
1
sufﬁciently close to a
0
. Since ∂V/∂a
1
> 0, the ﬁrm prefers the largest
a
1
(smallest amount of self-regulation) that is sufﬁcient to induce the
SIG never to lobby. Let ¯ a
1
be the smallest value of a
1
the ﬁrm is willing
tochoose; this canbe foundbysetting V( ¯ a
1
) = 0. Thus, the ﬁrmis willing
to self-regulate to any value of a between ¯ a
1
anda
0
if this will undermine
the SIG’s lobbying efforts.
37
Howdoes self-regulationaffect the decisions of the SIG? Recall that
conditions (2) and (3) deﬁne when the positive-biased SIG will ﬁnd it
worthwhile to lobby before the DM. An informative equilibrium exists
if l ∈ [l,
¯
l], in which case the SIG lobbies when the state is θ
H
but not
when the state is θ
L
. Self-regulation shifts the initial point to the left in
(a, l) space and, in the process, may cause the SIGto change its lobbying
behavior. This is perhaps seen most easily by reference to Figure 1, in
which the values of a and l that support an informative equilibrium lie
between the curves
¯
l and l. Figure 3 builds on Figure 1 but adds two
shaded regions, one of which is adjacent to
¯
l, while the other is adjacent
to l. In each of these regions, the initial point (a
0
, l) is within the region
where the SIG’s lobbying efforts are informative, but the ﬁrm ﬁnds it
proﬁtable to self-regulate, resulting in a leftward move that causes the
36. It is not uncommon in the literature on voluntary environmental agreements for
authors to assume that voluntary actions are less costly than mandated actions. The
authors of these papers argue that voluntary actions allow ﬁrms greater ﬂexibility in
meetingenvironmental goals. We refrainfrommodelingthis exogenous bias, whichserves
only to make voluntary actions more desirable. For a discussion of papers that adopt this
exogenous cost bias in favor of voluntary actions, see Lyon and Maxwell (forthcoming).
37. Note that ¯ a
1
= −
2β
3
θ
L
+
2β
3
_
(θ
2
L
+3θ
L
a
0
+3a
2
0
/2) and is thus a function of a
0
.
However, in what follows we suppress this dependence for notational simplicity.
Astroturf: Interest Group Lobbying and Corporate Strategy 589
FIGURE3. PROFITABILITY OF SELF-REGULATION
SIG to change behavior and eliminates the possibility of an informative
equilibrium. We summarize these results in the following proposition.
Proposition 5: There exist two sets of parameters for which corpo-
rate self-regulation can alter interest group lobbying behavior proﬁtably:
(a) a
0
(2|δ| +a
0
) > l > a
0
(2|δ| −a
0
) and l > (a
0
− ¯ a
1
)(2|δ| +a
0
− ¯ a
1
); or (b)
a
0
(2|δ| −a
0
) < l < (a
0
− ¯ a
1
)(2|δ| −a
0
+ ¯ a
1
). For initial parameter values in
either of these sets, self-regulation alters the incentives of the interest group,
eliminating the possibility of an informative equilibrium.
Proof . Begin with case (a). We require two conditions. First, a
0
(2|δ| +
a
0
) > l > a
0
(2|δ| −a
0
) ensures that the initial pair (a
0
, l) is such that an
informative equilibrium exists; that is, it ensures that l ∈ (l,
¯
l). Second,
l > (a
0
− ¯ a
1
)(2|δ| +a
0
− ¯ a
1
) ensures that after self-regulation l >
¯
l, so
that an informative equilibrium is not possible. Now turn to case
(b). The condition a
0
(2|δ| −a
0
) < l ensures that at the initial parameter
values, an informative equilibrium exists. The second condition, l <
(a
0
− ¯ a
1
)(2δ −a
0
+ ¯ a
1
), ensures that after self-regulation l < l, in which
case an informative equilibrium does not exist.
In this model, the key effect of self-regulation is to eliminate the
possibility of an informative equilibrium. As we discussed in section 4,
the ﬁrm ﬁnds this proﬁtable because reducing the ﬂow of informa-
tion insures the ﬁrm against adverse policy outcomes. This effect of
self-regulation has not been noted previously in the literature. Prior
work has shown that self-regulation can result in a lower level of
environmental protection than would have emerged otherwise from
the political process, but these papers were conducted in a setting
590 Journal of Economics & Management Strategy
where the decision-maker has complete information about the state of
the world.
38
Our results in this section show that self-regulation has
additional implications when the decision-maker is not informed fully.
Although self-regulation reduces the ﬂow of information to the
decision-maker, it also reduces the severity of the worst-case scenario.
Thus, the net impact of self-regulation on the decision-maker’s payoff
is more complicated than in the case of the bear hug. This is the subject
of the following proposition.
Proposition 6: Self-regulation reduces the public decision-maker’s ex-
pected payoff relative to the case of full information. However, the decision-
maker’s expected payoff under self-regulation is greater than it would be under
the bear hug.
Proof . Without self-regulation, the DM’s expected payoff is simply
G
0
= 0, since policy can be tailored precisely to the state of the world
ex post. With self-regulation, the DM lacks information about the state
and must set the average policy. Suppose that the ﬁrm’s self-regulatory
actions are observed by the DM. Then the DM sets p = θ
L
+a
1
/2, which
is equal tothe expectedvalue of the state. Nowthe DM’s expectedpayoff
becomes
E(G
SR
) = −0.5(θ
L
+a
1
/2 −θ
L
)
2
−0.5(θ
L
+a
1
/2 −θ
H
)
2
= −a
2
1
_
2 < 0.
Clearly E(G
SR
) < G
0
, and the DM is worse off as a result of the
ﬁrm’s self-regulatory action.
When the bear hug is used instead of self-regulation, the DM
again sets the average policy, but relative to the initial value a
0
> a
1
.
Thus, the DM’s expectedpayoff under the bear hug is E(G
BH
) = −a
2
0
/2 <
−a
2
1
/2.
In our model, when the DMhas full information about the state of
the world, she can tailor policy precisely to the speciﬁcs of the situation
before her, thereby reducing her loss function to zero. Self-regulation
is undertaken by the ﬁrm only if it will render the SIG’s lobbying
uninformative. This deprives the DM of the information she desires,
and as a result the DM is worse off. However, given that the ﬁrm
undertakes anex-ante strategy that renders lobbying uninformative, the
DMobtains higher utility fromself-regulation than fromthe bear hug.
39
Nevertheless, although self-regulation reduces the severity of the high
38. For an introduction to the work on this subject, see Lyon and Maxwell
(forthcoming).
39. We do not compare formally the DM’s expected payoff in the astroturf equilibrium
with that obtained under the bear hug or self-regulation. This is because the astroturf
strategy is applicable only when the ﬁrm already knows the state of the world, while the
other two strategies are applicable only when the ﬁrm does not know the state.
Astroturf: Interest Group Lobbying and Corporate Strategy 591
state, it never compensates entirely for the loss of information caused
by the decision to self-regulate.
6. Multiple Interest Groups
To this point, we have concentrated on cases involving only a single in-
terest group. Inthis section, we discuss howour results maybe extended
to cases with multiple interest groups. We follow the typology used by
Grossman and Helpman (2001) to classify the structure of multiple SIG
situations: (1) Like bias arises when all groups share the same direction of
bias but with different intensity; (2) Opposite bias arises when different
groups are biased in opposite directions; and (3) Unknown bias arises
when the groups receive imperfect signals regarding the state of the
world. The ﬁrst two cases, in contrast to the third, assume that both
SIGs have perfect information regarding the state of the world at the
time they lobby the DM. We consider these in turn, focusing on the case
of two SIGs for simplicity.
6.1 Like Bias
We will label the two SIGs radical and moderate, with the former pos-
sessing a larger value of δ. We assume the moderate group, as in earlier
sections, has a bias that satisﬁes conditions (1) through (3). The more
radical group may meet these conditions but also could be so biased
that it always lobbies and always claims that the state is high. This latter
possibility may arise even if lobbying is costly, if the radical group’s
bias (δ) is high enough and the DM’s off-equilibrium belief is that the
state is low if the group fails to lobby. If the ﬁrm prefers a policy set
at the average level, then it prefers to mute (render uninformative the
group’s lobbying actions) the moderate group, since the radical group
lacks credibility anyway. This can be accomplished by bear hugging the
moderate groupex ante, if that group’s bias is great enoughthat it always
will claim the state is high when lobbying is costless. (Alternatively,
similar results can be achieved through astroturﬁng ex post, if the group
has a negative bias.) Thus, this case differs little fromthe single SIGcase
analyzed previously.
Alternatively, if the radical SIG’s bias is not too great, then the
DM also could rely on it to provide reliable information through costly
lobbying. In this case, bear hugging (or astroturﬁng) the moderate SIG
will not be sufﬁcient to affect the DM’s decision. Instead, the ﬁrm must
subsidize both SIGs. Again, however, this case differs only trivially from
the case of a single SIG.
40
40. Equilibria in all models with incomplete information depend critically on the
beliefs held by the players. In our model, the actions of the ﬁrm depend on how the
592 Journal of Economics & Management Strategy
Overall, we conclude that the addition of a second SIG with like
bias to that of the ﬁrst SIG is unlikely to generate much additional
insight. However, it is worthnotingthat if all groups must be subsidized,
then the cost of any kind of subsidy strategy rises with the number
of SIGs. This is not true of the self-regulation strategy, however. A
single voluntary improvement affects all SIGs at once. If the ﬁrm
undertakes enough voluntary action to preempt the involvement of
the most extreme group, then all other groups will be preempted as
well. Thus, we hypothesize that self-regulation is likely to outperform
subsidy strategies as the number of SIGs grows.
41
6.2 Opposite Bias
When the two SIGs are biased in opposite directions, matters become
more interesting. At least two types of equilibria are possible: (1) the DM
ignores one SIG and simply relies on the other; and (2) each SIG lobbies
in one state of the world, and the DM relies on both. In particular, an
equilibriumof the second type may exist in which the SIGwith positive
bias lobbies in the high state, while the SIG with negative bias lobbies
in the low state (see Grossman and Helpman, 2001, ch. 5 for details).
Case 1 is similar to the case of like bias. If the ﬁrm successfully
renders uninformative the “active” SIG, either through the bear hug or
through astroturf, then the inactive SIGmay ﬁnd it worthwhile to lobby,
and the DM will ﬁnd it worthwhile to pay attention to it. Thus, the ﬁrm
needs to deal with both of the SIGs. Alternatively, the ﬁrm may use
self-regulation to inﬂuence both SIGs at once.
Case 2 is somewhat more complex. On one hand, if the lobby-
ing activities of one group are rendered ineffective, then the initial
equilibrium is destroyed. However, there is an alternative equilibrium
(Case 1) in which the DM pays attention to only one of the SIGs, and
this becomes the only equilibriumif one SIGis silenced. Hence, the ﬁrm
again must undermine the credibility of both groups, if it wishes to be
successful. On the other hand, if the ﬁrm knows the state of the world,
it might choose to engage in astroturf lobbying when the state is high,
thereby inducing the negatively biased SIG to lobby at the same time
that the positively biased SIG lobbies. The effectiveness of this strategy
DM chooses to interpret the lobbying actions of the SIGs. For example, suppose the DM
heldthe belief that the state is high if both SIGs lobby andis lowif neither ﬁrmlobbies, and
he views any other outcome as uninformative. Then the ﬁrm would achieve the average
policy by muting only one SIG.
41. This is likely to be the case particularly if the bias of the most radical group does
not change as the number of groups grows. Otherwise, if the bias of the most radical group
grows along with the number of groups, then the cost of self-regulation will growas well,
and the cost comparison becomes more difﬁcult.
Astroturf: Interest Group Lobbying and Corporate Strategy 593
will depend on the DM’s beliefs in this out-of-equilibrium event. If,
as seems reasonable, the DM sets the average policy when both SIGs
lobby, then astroturf may be proﬁtable in exactly the same way as in
section 3.
The general point is that the basic structure of our analysis appears
to remain valid in the presence of multiple SIGs, as long as those SIGs
all possess full information regarding the state of the world. The main
change fromadding multiple groups is that self-regulation may become
relatively more attractive as the number of SIGs rises.
6.3 Unknown Bias
As before, one group is assumed to be radical and to be willing to lobby
in both states of the world. However, the DM is assumed to be unable
to distinguish one group fromthe other and hence only can make use of
information regarding the number of ﬁrms that lobby. Lohmann (1993)
analyzes this setting in the context of N > 2 groups, but Grossman and
Helpman (2001) show that her main insights can be derived in a model
with just two groups. Consider the case of two groups with like biases.
Lohmann emphasizes the case in which the more radical SIG always
lobbies, regardless of the state. The DM does not know which group is
the more biased but still can use the extent of lobbying as a noisy signal
regarding the state of the world. For example, the DM may conclude
that the state is high if two SIGs lobby and is low if only one does.
42
If
the ﬁrm can identify the more moderate SIG, then it can subsidize the
moderate group, just as in the case of known bias. If this is not possible,
then the ﬁrm must subsidize both groups.
Nowconsider the case of opposite bias. Suppose that the SIGwith
positive bias is the more radical one, and it plays the role of a pure
advocate; that is, it always lobbies and claims the state is high. The more
moderate SIG only lobbies when the state is low. Thus, the appearance
of one SIG indicates that the state is high, while the appearance of two
groups indicates the state is low; thus, the DM sets a low level of policy
when both groups lobby but a high level when only one group lobbies.
Once again, if the ﬁrm subsidizes the moderate group, then that group
always (or never) will lobby, andthe DMmust set policywithout gaining
anyinformationfromthe SIGs. If the ﬁrmcannot determine whichgroup
is which, then it must subsidize both.
42. A failure to lobby by both ﬁrms is off-equilibrium path behavior. Grossman and
Helpman (2001, p. 154) identify beliefs for the DM under which it infers the state is low
when neither ﬁrm lobbies.
594 Journal of Economics & Management Strategy
7. Conclusions
In this paper, we have developed a model to explore how a ﬁrm may
inﬂuence the lobbying behavior of special interest groups when the
ﬁrm’s own lobbying efforts lack credibility with decision-makers. We
built on the framework presented by Potters and van Winden (1992), in
which costly lobbying may convey unveriﬁable information to a public
decision-maker. The basic idea of this framework is that when lobbying
is costly, an interest group’s decision to lobby can provide credible
information about the underlying state of the world. We have shown
that ﬁrms may have both the incentive and the ability to undermine this
information transmission process, reducing the public decision-maker’s
payoff in the process.
We considered three corporate nonmarket strategies: (1) astroturf,
inwhicha ﬁrmthat knows the state of the worldsubsidizes the lobbying
activities of a group with similar views; (2) the bear hug, in which
a ﬁrm that does not know the state of the world pays an interest
group to alter its lobbying strategy; and (3) self-regulation, in which
a ﬁrm that does not know the state of the world voluntarily limits the
potential social harms from its activities. All of these strategies reduce
the informativeness of lobbying, which can be proﬁtable for the ﬁrm.
In many situations, the ﬁrm is likely to know the true state of the
world already, especially if that state depends on characteristics of the
ﬁrm’s technology or management processes. For example, the state of
the world might be the level of health risk associated with the operation
of a particular plant, whichdepends uponcorporate decisions regarding
technology and management. In such settings, astroturf lobbying can
be used by the ﬁrm, which covertly subsidizes the lobbying activity of
an interest group with similar preferences in states of the world where
the interest group would not lobby otherwise. For example, the group
might represent local business organizations that stand to beneﬁt if
the ﬁrm builds a new plant in the area. We model this strategy as a
form of costly state falsiﬁcation. We show that the decision-maker has
incentives to audit the relationship between the ﬁrm and the interest
group for evidence of astroturf lobbying and to identify conditions
under which astroturf lobbying nevertheless takes place in equilibrium.
Our model shows that alawrequiringthe reportingof astroturf lobbying
expenditures would render the strategy ineffective and that this would
be desirable for the public decision-maker.
Requiring the reporting of astroturf lobbying expenditures is
worthwhile but is not a panacea. We examine two alternative corporate
strategies that also can reduce the informativeness of lobbying, even
when their use is common knowledge to all players. These strategies
Astroturf: Interest Group Lobbying and Corporate Strategy 595
differ from astroturf lobbying in that they can be used only by the ﬁrm
before it learns the true state of the world. This is likely particularly in
situations of truescientiﬁc uncertainty, suchas currentlyexists regarding
the future impacts of global warming. These alternative strategies can
prevent special interest groups from informing the decision-maker
about the true state after they learn its value.
The bear hug serves as a signal-jamming device that prevents the
interest group from signaling the intensity of its views. Since the ﬁrm’s
costs are increasing and convex in policy stringency, the ﬁrm gains if
the public decision-maker sets policy based on expected or average
social harm rather than tailoring policy to actual harm ex post. The bear
hug can be accomplished most cheaply by paying the interest group
never to lobby. If this is unpalatable politically always for the interest
group, however, the ﬁrmmaypaythe interest groupto lobby, whichalso
undermines the group’s abilitytoconveyinformation. One might expect
that the group would be unwilling to accept a subsidy that reduces the
credibility of its statements. Nevertheless, we show that if lobbying is
costly enough, then it is incentive compatible for the group to accept
the ﬁrm’s embrace. It is important to note that this strategy may not
be dynamically consistent for the ﬁrm: even though it raises expected
proﬁts ex ante, it is unproﬁtable ex post insome states of the world. Hence,
the ﬁrm may have incentives to renegotiate the bear hug contract, a
possibility that limits the circumstances in which this strategy can be
used.
The third strategy we study is self-regulation, namely, voluntary
actions to reduce the social harm that occurs in adverse states of the
world. Such voluntary actions can change the lobbying incentives of
interest groups andmay render themuninformative, which is proﬁtable
for the ﬁrm in the same way as is the bear hug. This aspect of self-
regulation has not been recognized previously in the literature. While
self-regulation makes the decision-maker worse off, relative to the full-
information outcome, we show that it is less harmful to the decision-
maker than is the bear hug strategy, which does not mitigate the severity
of the worst-case scenario.
Our analysis focuses on the case of a single interest group but
appears to be robust to the incorporation of multiple groups. The most
interesting possibility that arises with multiple groups is that self-
regulation becomes relatively more attractive, since a single investment
inself-regulationcanmute all groups at once, while the cost of a strategy
based on subsidies rises linearly with the number of groups.
Under all three of the strategies we consider, the public decision-
maker is made worse off. The reason is that when the decision-maker
is informed fully, she can tailor policy precisely ex post to the particular
596 Journal of Economics & Management Strategy
state of the world. All three of the strategies we study here are designed
to stem the ﬂow of information, and while this increases proﬁts it
simultaneously reduces the decision-maker’s expected payoff.
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